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Is It Time to Switch Your Portfolio Management System?

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I find it interesting that many advisors aren’t exactly thrilled with their portfolio management system; it’s fairly common to find many considering a switch. The ongoing release of new features and enhancements offered by providers encourages advisors to evaluate whether their aging system is right for their firm, or if the latest and greatest product really could improve their productivity and profitability. The challenge for advisors is in understanding how to properly evaluate a possible switch.

Given the fact that an investment advisor’s product is usually financial planning and investment management, you can easily argue that the investment portfolio management system is one—if not the most—important technology in an advisor’s office. The system is critical to the advisor’s back office, of course, but it is also one of the few products that actually “touch” clients.

In some cases, the reports generated from the system might be the only items clients review each quarter. Therefore, when considering changing PM systems, it is critical to think about all aspects of its use and implementation. Identifying the benefits of making the change is sometimes the easy part. Ensuring important items aren’t overlooked is consistently the more difficult challenge. Even if the advisor has no desire or need to switch portfolio management systems, this exercise will help reaffirm that the current system is meeting both current and future needs.

When evaluating PM systems, the first thing most advisors review is the performance reports produced by the software. This makes sense given the important role performance reporting fulfills in communicating investment returns to clients. The challenge with evaluating a new system’s performance reports is not only understanding your needs today, but also taking into consideration your future needs as well. In fact, it has been my experience that one of the primary drivers for an advisor switch in systems is they want improved and ultimately more flexible performance reports. One key element is whether the program’s manufacturer is consistently improving its performance reporting capabilities. Your reporting needs will likely change over time. You will probably add new asset types to your investment mix over changing market cycles. For example, if you primarily use mutual funds today, how might your reporting needs change if you begin to use ETFs or fixed income securities? Also the type of clients you serve can directly impact reporting needs. Foundations and non-profit organizations, for example, tend to require very different performance reports versus a traditional private client. Overall, selecting a system that can accommodate reporting needs as you grow is critical to fostering a lasting relationship with clients, and the system provider needs to be in tune with the ways your business evolves.

Another important area to evaluate is how your staff will interact with the product. This area is frequently under-evaluated and is often the root of why a particular system fails to be effectively implemented at a firm. Even simple items like the process for initiating new clients, to the steps required to update cost basis can make an impact on the staff. The fact is systems operate differently, and there can be a variety of opinions about the most efficient process to accomplish a task—even if the end result is the same. Producing quality performance reports is important, but the number and difficulty of the steps required to produce said reports is just as important. Therefore, be sure the actual users of the system have a strong voice in the decision-making process. And better yet, have the users create a checklist of the 10 to 15 most common processes currently in place at the firm and run each one using the prospective portfolio system. The more testing and involvement your back office staff has before the purchase, the bigger the dividends will be when you actually install the new system.

Although not the most glamorous part of evaluating a new system, the quality of the data processing is an area that requires close attention as well. The look and feel of the performance reports is essentially irrelevant if the system has issues with processing account data. The place to start is in evaluating your system’s ability to interpret data provided by the custodian. Having a custodial data interface available is not enough. You should ask questions in regards to the number of advisors using the interface and how long the interface has been available. This is important because data interfaces take time to reliably build and deploy. Creating a data interface is more an art than science. Be sure to review how unique data entries will be processed between the data interface and the portfolio management system. For example, if you know what a particular issuer’s corporate action event is (one of the more complex events in an investment account) and you can see the system handles it correctly, you can gain some level of confidence that it will address other events as well.
The cost to purchase the system is just the beginning. Another possible expense is converting data from your existing system to the new system; be sure to make it a part of your evaluation. The challenge for advisors is to ensure costs alone do not drive the ultimate decision. In the portfolio management system product space, there are a number of providers with a wide range of different features and functionality. In addition, there are outsource solutions, Web-based, desktop and various flavors of overall support and service. These variables can dramatically affect cost. I recommend you consider systems in a range of costs. Don’t solely evaluate the least expensive or, for that matter, the most expensive systems. Give a good look at several systems at multiple price points. You will greatly improve your chances of selecting the best system for your firm, rather than the best price for your firm.

A new system is similar to the purchase of a home. Your goal is to be happy with your living conditions, without feeling the need to again move. When you own the right home, it makes everything else a bit easier. The same is true for your portfolio management system. Therefore, take the time to give any new system a complete evaluation. Over the years, I’ve heard success stories and not-so-successful stories from advisors with new portfolio management systems. The difference between the two is how well the advisor evaluated the system beforehand, minimizing any potential surprises after they wrote the check.    

Dan Skiles is the executive VP of Shareholders Service Group in San Diego. He can be reached at [email protected].


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